taxes

Traditional IRAs work fine for some filers

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When it comes to individual retirement accounts, you have several choices. All offer some tax savings. The big difference is when, exactly, you get those savings.

For some people, a traditional IRA still has a lot of appeal. These taxpayers find that this type of savings plan helps build tomorrow's nest egg while reducing today's taxes, thanks to a deduction that doesn't require itemizing.

Traditional IRA contribution limits

20152016
Younger than 50$5,500$5,500
Age 50 or older$6,500$6,500

The maximum contribution limits are per taxpayer. And keep in mind that taxpayers who aren't covered by an employer-provided retirement plan can take the full deduction, whereas income limits apply to those who do have access to a plan.

But before the lure of lower taxes prompts you to open a traditional IRA, be aware that a contribution won't automatically cut your tax bill by that much. Rather, at the bottom of Form 1040 or Form 1040A, you subtract your contribution amount from your income to come up with your adjusted gross income, and then you figure your tax bill. And the less taxable income you have, generally the smaller the check you have to send to the IRS.

OK, even though it's not a direct contribution-to-write-off situation, you've determined that a traditional IRA is a good move, but you didn't have the money to contribute last year. No problem. Just because the tax year ended Dec. 31 doesn't mean your annual contribution opportunity stopped then, too.

Young man in coffee shop | PeopleImages.com/DigitalVision/Getty Images

The allowable contribution amounts can be deposited into your traditional IRA as late as the annual tax-return filing deadline and still count toward cutting your prior year's tax bill. You even can file your return before you make your contribution.

Just be sure you actually put the money in your account by the April deadline. Remember, the financial institution that manages your IRA sends account activity information to Uncle Sam, as well as to you.

Income limits

Of course, for every rule that makes it easier to contribute to a traditional IRA, there are others that complicate the deduction process.

If you or your spouse has a retirement account at work, including a 401(k) plan option, a Keogh or simplified employee pension IRA, or SEP IRA, for self-employment income, you might not be able to take the full tax break of a traditional IRA. But all immediate tax savings may not be lost. Some of your traditional IRA contribution still might be deductible, as long as your income falls below IRS limits.

For 2015 returns, a single or head-of-household filer with a company-provided pension plan can earn up to $71,000 and still get a partial IRA deduction. The earnings cap is $118,000 for joint filers where one or both spouses have a company retirement plan. If you don't have a company plan but your spouse does, the modified adjusted gross income limit before you lose your full deduction is even higher -- $193,000.

If you've already contributed for 2015 and want to put in money for the 2016  tax year, the contribution amounts, regular and catch-up, are the same. Low inflation also keeps the income limits in 2016 for single or head-of-household filers the same; you can earn up to $71,000 and still get a partial IRA deduction. The limit remains at $118,000 for joint filers where one or both spouses have a company retirement plan. However, if you don't have a company retirement plan but your spouse does, the modified adjusted gross income limit in 2016 for at least a partial deduction is $194,000.

The worksheet in the Form 1040 instructions, or 1040A booklet if you file that form, will help you figure out how much of your contribution you can deduct.

Other IRA considerations

Employer-sponsored retirement options aside, keep in mind that you might not be able to max out your IRA contribution at the annual limit.

You can contribute, and potentially deduct, only as much as you earn. If you make $3,800 this year, then that's the most you can put in any IRA.

And if you're 70 1/2 or older, you can't put any more money into your traditional IRA. In fact, that's the age when the IRS demands you start taking money out of your traditional, tax-deferred retirement account.

So is a traditional IRA right for you? Only a thorough examination of your overall financial and tax circumstances can tell. Do your homework and look at the earnings potential and tax savings -- now and in the future -- of each IRA type. You have until the April tax-filing deadline to decide which is best for you.

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